Later Retirement: Japan Leads the Way--BECKER

In our last posting, I argued that many mentally and physically healthy older persons in developed nations retire earlier than is socially efficient. Since retirement benefits are not sensitive to the accumulated social security taxes that a person pays on his or her earnings, workers who become eligible to retire often find the improvement in retirement benefits from working longer too small to provide enough incentive to continue working. We come back to the retirement issue this week because I discovered during a just concluded trip to Japan that this country has taken the lead in encouraging much later effective retirement than other developed nations. The system in Japan is a bit complicated, but has several important features that could be implemented in the United States and other nations. The Japanese approach also has implications for many comments on our discussion last week- I respond to these separately. The official retirement age at medium and large Japanese companies is 60 for both men and women, and it is quite rigidly enforced, even for top executives. This retirement age is close to the lowest among rich countries, with official retirement in the United States being about five years later at age 65, and the average among 30 OECD member nations being about 64. As Posner and I discussed in the previous entry, the American Age Discrimination in Employment Act of the early 1990’s even prohibits mandatory retirement for professors and a few other occupations. Most Japanese do not stop working at age 60. The OECD reports that Japanese men generally continue to work until almost age 70, and the average retirement age of women is only a few years younger. These retirement ages of both men and women are the highest among all OECD nations that include not only the United States, but also the nations of Western Europe. I was initially puzzled by these OECD data for Japan since they suggested much later retirement ages than I presumed from my erroneous belief that actual retirement ages were close to the official ones. But Japanese specialists on older workers indicated to me that their numbers are similar to those of the OECD. According to these Japanese sources, about half of all men aged 65-70 are working, and so too are about one quarter of men between 70-75. Hence they too estimate an average retirement age of near age 69. Even when they stay at the same company after age 60, which is fairly common, workers and executives are placed at lower level jobs with significantly reduced pay. Others go to smaller companies with lower pay, although perhaps in comparable positions that they had in the larger companies that had employed them for many years. In all cases they work at their new jobs for a fixed term, usually five years. Upon finishing that term at age 65,they tend to move on to other jobs, also with a fixed term, and frequently with a further reduction in their earnings. What spurs the Japanese to work beyond the official retirement age is partly that they usually are in good health, and do not look forward to about 30 years of retirement without much to do. However, they also continue to work because retirement benefits from the government and private companies are modest, even for higher-level executives. Retirement income of about $2000 per month is at the high end, so most workers who retire at 60 receive much less than that. They decide to work in their 60's and their 70's in order to supplement greatly their incomes. In this way the Japanese system enables men and women to keep working to relatively late ages while at the same time providing flexible earnings and activities of older workers. In effect, this system recognizes that while older workers generally remain productive in the modern era of good health, they may not continue to merit the earnings reached after many years of employment. Some economists have attributed mandatory retirement to the need to move older workers out of the labor force because they are paid more than their contribution to production. Whether or not this interpretation of mandatory retirement is correct, the Japanese system does provide flexibility in both the earnings and occupations of older workers while still mandating official retirement at the early age of 60. The Japanese system where employees past age 60 sometimes work for lower pay at the same company that had employed them would not be possible in the United States and some other countries because of legislation that prohibits alleged discrimination against older workers. The combination of legislation that prevents companies from lowering the earnings of older employees, and of legislation that prevents mandatory retirement in some occupations, creates a major rigidity in the market for older workers. In several crucial respects the retirement system of many European countries is the opposite to that of Japan. For example, the official retirement age of men in Belgium, German, and the United Kingdom is 65, five years higher than in Japan. Yet, actual retirement ages are considerable lower in these countries than in Japan. For example, the typical age of retirement is 59 and 61 in Belgium and Germany, respectively. Effective retirement ages are also below age 60 in Italy, France, and several other Western European countries. In these countries inflexible labor markets make it difficult for older persons to find work, and generous benefits encourage retirement at even earlier ages than the official age. Early ages of actual retirement and generous retirement benefits contribute to the very serious problems faced by the social security systems of most West European nations, and to a lesser extent of the United States. By extending their actual retirement ages to the Japanese levels, these nations would go some ways toward solving their problem of financing old age benefits. The Japanese intrinsically face a tougher retirement problem than most other member nations of the OECD since they have one of the lowest birth rates in the world, the oldest life expectancy, and virtually no immigration. As a result, about 40 per cent of the Japanese population is expected to be aged 65 or older by the year 2050, the largest fraction of elderly among OECD countries. The continued employment of most of their men, and to some extent their women, well beyond the official retirement age of 60 has helped to meet, although it has not solved, Japan’s challenge of a rapidly aging population. Still, however, their flexible approach to the employment of older persons provides an excellent example to be emulated by other nations faced with a rapidly growing elderly population.

Comments

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[Laura]

The Japanese system does sound effective, but I have a hard time imagining it crossing over to American business culture, because American culture in general tends to be much more individualistic, while the Japanese view themselves and their work more collectively, as contributing to a whole. The idea of Terry S. Semel moving from CEO to an assistant VP position at Yahoo, for instance, seems ludicrous since he joined the company as CEO. There tends to be a strong cult of personality in American business (and in upper-level education), though whether it's superior to the Japanese model is an open question.

[Laura]

Is there any suspicion of conflict of interest in post-60-year-old Japanese execs transferring to different companies in the same field?

[Tyrr]

First off, Americans do enjoy their leisure time more, considering your average Japanese citizen lives in something the size of a rat cage and Americans have a lot of open space in the suburbs and especially in the country. Some people would say that they travel and Japan has a lot to do, but traveling costs a lot of money and there really isn't a whole lot of fun stuff to do in Japan that's free that old people can do or would want to do from my understanding of it. Somewhere in the viscinity of 50% of America is undeveloped, unused space if you check out maps.google.com. America has 10 times as much land per person than Japan does. It doesn't take a lot of money to drive out to a mountain or large hill, climb ontop of it, break out the lawn chair and sit ontop and watch nature. Nor does it take a lot of money to fix up old junked up cars in your garage. Do Japanese have garages or huge open spaces?

More importantly, the Japanese have a very different society. In America, work is considered boring and lengthy to some and something to be avoided as in all western societies. In Eastern cultures, work is considered an honor and is what makes a man. You have work, you are a good person. If you don't, you're lazy. If you're retired, you're considered a wise person because you've managed to survive that long.

That isn't true all around, but the culture making the decisions thinks that way.

As far as human experience goes, and what values a person should be doing with those retirement years, however, I think they can be nicely summed up in the movie Baraka. Although, several other movies comes to mind made by the same director that would also are pertinant.

http://www.spiritofbaraka.com/

The second thing I think that should be asked isn't so much how long can we work an old person. The answer is already known; it depends on their health. With the way most Americans behaive it's a wonder they live past 55. The question that should be asked is should we be working the old people? Why do they need to work that long?

I am of the opinion that the fruits industrism brought have been wasted in 2 fashons. The first is in $20 sneakers that fail after 6 months. I'v got a pair of combat boots that will last at least 6 or 7 years if I take care of them; that's how it should be. Quite simply it was wasted on bad products. Economies are based on resources, and when those resources are wasted and considered expendable, then they become precious commodities later on.

I may be young but I understand you don't waste things.

This waste has brought the cost of living up exponentially. For example, my combat boots set me back $80, and every year I need to do $10 of maintainance (polishing every 2 weeks). They are designed to last 10 years; the rubber will wear out after 2-3 and a cobbler needs to throw on a new rubber for about $30. So, in total, the cost of these boots, in 10 years, is around $300. I go out and I buy a pair of timberlands that wear our in 8 months for $60. In 10 years of doing that, I'v $900 on a footwear. More importantly, how much more work needs to be done? Laces aren't calculated because in either case I make laces out of paracord.

Did I mention my boots are water proof, chemical and electrically resistant, combat tested, have steel toes, take 10 minutes (with 2 sets of socks; wool and cotton) to put on but are laced for the rest of the day, and are the most comfertable pieces of footwear I'v ever had? These boots do *not* fail either; I don't have to deal with a month of holes or my feet being scraped up by a cruddy piece of plastic. If I want a nice pair of dress shoes I can get the same kind of boots and gloss shine them in under a day and nobody knows the difference in a suit; it also gives you an air of authority because they make a nice clunk.

Use wash-cloths instead of napkins and toilet paper

Glass plates instead of paper plates

Metal glasses instead of paper glasses

Cook your own food instead of buying cooked food (healthier too)

Get a large plot of land and seperate your garbage into 3 sections; recyclables, organics, and non-organics. Recyclables the recyclable companies can take, organics you can use for fertilizer to grow your own food, and the non-organics, well, those either go to the dump. About 10% of what we throw away is truely disposable.

The consumer culture is the first, and main, reason. The funny part is, it really doesn't take a lot of extra time either.

The second is that a great deal of the resources we've had has been wasted by the wealthy. How many manhours have we spent building, designing, and using tanks, nukes, firearms, mansions, and so on? How much of our economy is based on serving them rather than us? A great deal of wealth has been stolen by these people, where has it gone, what has it been spent on? Money is resources weither it's bricks, manhours, or greenbacks, and if it sits there without moving then it doesn't factor into the equation, so where has it been spent? I don't know, but it seems to me the toll of that would be pretty big.

[TheWinfieldEffect]

PENIS TAX?

One significant aspect of the Japanese retirement system is how it reflects broader political and social reality. Retirement benefits in Japan used to be linked to promoting childbirth and child-rearing -- after all, couples that raise children bear a tremendous opportunity cost.

But since women have begun to flout traditional Japanese gender roles and social expectations -- marrying later in life, not having children, living as single women into their fifties -- the benefits they draw from the system are no longer in exchange for the opportunity cost of bearing children and raising them, i.e., it's just free money. In other words, it's an income transfer from typically rural families (where women tend to marry and have kids) to typically urban singles (who tend to have more education and economic opportunity).

This has caused Japanese politicians to seek reform of the retirement system to focus benefitting families and not singles, which, of course, has angered Japanese feminists. There was a Washington Post article from not too long ago quoting a Japanese minister who noted that the retirement system had been transformed into a "penis-tax" (you bear the brunt of the tax if you have a penis; you receive a cost-free benefit if you don't).

BECKER: "The less people value leisure, the later they will want to retire and so the less money they will want to put aside for retirement."

Oddly, Japanese women as a group (because of the growing numbers of them living as unmarried middle-agers) have begun to value leisure more, but they also acquire assets like homes and cars and stocks and bonds. While those assets are not specifically retirement savings, they can certainly be used as collateral to finance retirement. At the same time, because the retirement system is still assuming that older persons have already raised children and deserve what amounts to compensation from the state, these singles get the state bundle o' cash too. The result is not a net of less retirement savings for these free riders, but a net of more (at least for the free riders).

[Nathan Kaufman]

Why do organizations do irrational things?

[Corey]

I see an awful lot of characterizing Japanese people in broad stereotypical strokes, done by people who aren't giving any justification for why they should know.

There are 125+ Million Japanese people. Many of them are passionately individualistic. (Beat Takeshi comes to mind, also as an example of the cult of personality.) It is ironic to talk about Americans as more "individualistic" in an age where the majority of the population shops at WalMart, eats only at national chain restaurants, and reads only books that have been endorsed by Oprah. After one month in Tokyo, I found Americans to be more monolithic culturally. (However, I would not assert that as a truism based on such limited knowledge of Japan)

Oh, BTW, since someone mentioned Yahoo CEO Terry Semel. Everyone should know that his compensation package added up to $230 Million last year.

[Flavio Rose]

A few comments. (1) The American problem with retirement financing is not so much money for older people to subsist as the exploding cost of Medicare (and wait until the drug benefit comes online!). Would it be proposed to also raise the age of Medicare entry? Then we'd essentially be pushing some part of the post-65 healthcare problem off on private employers and especially on the new class of uninsured persons over 65. We'd also raise the effective cost of hiring older people for employers who offer health insurance since the older people will continue receiving health insurance past 65. Would this further discourage employers from offering health insurance? (2) There's lots of downsizing in the American private sector. Thus later retirement implies later job searches and later spells of unemployment. Anecdotally, I see early retirement being often the result of people who are downsized giving up on finding another job. The government can't I think magically erase the reluctance of private employers to hire older people.

[J R Weisser]

Having lived in Tokyo for 12 years, I guess I am a bit more reluctant to speak about how wonderful the system is, though I do feel comfortable generalizing about the system.

Traditional Japanese corporations have operated on an "entering class" basis, with a narrowing pyramid as you approach the top. As such, when the bulk of the class reaches 60, it is time for them to retire. More senior management, however, moves to either run a subsidiary (with high perks and decent salaries) or becomes "executive advisor" to a company--which are sometimes valuable and sometimes not. So, in the case of Semel above, he would not retire to become an associate VP, but would instead move into a chairman or special advisor role with the company or with the board.

People lower down the food chain often have to move from something that they have presumably specialized in (questionable, given how companies tend to not to have employees specialize) move into positions which pay subsistence, and tend towards light manual labor, with a number of these positions being governmental or semi-governmental positions...While it may not be representative, I keep thinking of the "bike police" who come to "tow away" illegally parked bicycles, who are almost always men in their mid-sixties and employed by the government.

Finally, Becker, Posner, I greatly enjoy reading your work, and encourage you to keep it up.

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